On the call, Luca Maestri said that “number of units sold in a quarter is not representative of underlying state of business.” This reflects slowing unit sales growth in key products — the iPhone grew 0% in units this quarter — and Apple’s expanding reliance on services for ongoing sales growth.
As part of these changes, Apple will now report overall total revenue and cost of sales. The ‘Other Products’ business is being formally renamed to “Wearables, Home, and Accessories”, comprising products like Apple Watch, Beats and HomePod. It also means it incorporates products like the iPod touch… which doesn’t exactly fit into any of those three categories.
Benjamin Mayo
Guess I won’t be doing another sales forecast for Apple products this year… nor for the foreseeable future.
Still, this was to be expected, given that iPhone sales (that generate the majority of Apple’s revenues) have been stagnating for the past four years, and their other main products have performed even worse. Markets have reacted badly to the news, especially as it’s been accompanied by warnings of missed sales expectations for the 2018 holiday quarter, and some analysts predict stock prices will continue on the down turn. It even allowed Microsoft to overtake Apple as the most valuable company at the end of November.
Services should be the next big growth driver, according to Apple at least, but there are many doubts around this strategy. The main problem is that Apple has been always so focused on integrating services with their devices, that they have consistently neglected other, larger, platforms, namely Windows and Android. The same seems to apply to their yet-to-be-finalized entry in the streaming business. With slowing iPhone sales, user growth on the iOS platform will also stall, limiting the base that would conceivably pay for Apple’s services. Higher prices and stronger competition from Chinese flagship devices will make it more difficult for Apple to expand into China and India, the largest emerging markets; coupled with the brewing trade between the US and China, which could negatively impact their carefully designed supply chains, and the lookout is not very promising.
But globally, iOS isn’t as attractive. In the Chinese market, an app called WeChat is practically an operating system unto itself, allowing users to do everything from message someone else to pay their electrical bill or order food. And WeChat runs equally well on Android or iOS, meaning the iPhone has consistently struggled to find a foothold in the Chinese marketplace. In other markets, messaging apps like WhatsApp are dominant, and phone price is much more of a concern. The results are stark. In the U.S., about 40 percent of phones run iOS. Globally, that number is just 14 percent.
But its strategy of slowly raising its average selling price while selling fewer phones has a natural limit. “That’s a dangerous path”, says Shih, “because when you lose the volume, then you lose a lot of the manufacturing efficiencies and some of the cost benefits”. Moreover, for Apple to be successful in replacing lost revenue with its services division, it still needs a large number of iOS users. Raising the average selling price is effective in the short term, but may backfire in the long term. “Apple will exhaust that strategy,” says Yoffie. “When Apple is at an average selling price of $800, and the rest of industry is at $300, you can only defy gravity for so long.”
Jake Swearingen
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